**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**Form 10-Q**

 

**ý****        Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the quarterly period endedOctober 31, 2003**

 

**OR**

 

**o****        Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**Commission File Number:  001-11807**

 

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**UNIFY CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **94-2710559**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  Number) |

 

| **2101 Arena Blvd, Suite 100  Sacramento, California 95834** |
|--------------------------------------------------------------|
| (Address of principal executive offices)                     |
|                                                         |
| **Telephone: (916) 928-6400**                                |
| (Registrant’s telephone number, including area code)    |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

YES ý    NO o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

21,631,520 shares of Common Stock, $0.0005 parvalue, as of November 30, 2003

 

 

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**UNIFY CORPORATION**

**FORM 10-Q**

 

INDEX

 
| PART I.        | FINANCIAL  INFORMATION                                                                                                        |   |
|----------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                          |   |
| Item 1         | Financial  Statements                                                                                                         |   |
|           |                                                                                                                          |   |
|           | Unaudited Condensed Consolidated Balance  Sheets as of  October 31, 2003 and April 30, 2003                         |   |
|           |                                                                                                                          |   |
|           | Unaudited Condensed Consolidated Statements  of Operations for  the three and six months ended October 31, 2003 and 2002 |   |
|           |                                                                                                                          |   |
|           | Unaudited Condensed Consolidated Statements  of Cash Flows  for the six months ended October 31, 2003 and 2002           |   |
|           |                                                                                                                          |   |
|           | Notes to Unaudited Condensed Consolidated  Financial Statements                                                               |   |
|           |                                                                                                                          |   |
| Item 2         | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                   |   |
|           |                                                                                                                          |   |
| Item 3         | Disclosures  about Market Rate Risk                                                                                           |   |
|           |                                                                                                                          |   |
| Item 4         | Controls  and Procedures                                                                                                      |   |
|           |                                                                                                                          |   |
| PART  II.      | OTHER  INFORMATION                                                                                                            |   |
|           |                                                                                                                          |   |
| Item 1         | Legal Proceedings                                                                                                             |   |
|           |                                                                                                                          |   |
| Item 4         | Submission of Matters to a Vote of Security  Holders                                                                          |   |
|           |                                                                                                                          |   |
| Item 6         | Exhibits  and Reports on Form 8-K                                                                                             |   |
|           |                                                                                                                          |   |
| SIGNATURE      |                                                                                                                          |
|           |                                                                                                                          |
| CERTIFICATIONS |                                                                                                                          |

 

2

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**PART I****.****                            FINANCIALINFORMATION**

**Item 1.****                                   FinancialStatements**

 

**UNIFY CORPORATION**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
|                                            |   | **October 31,  2003** |   | **April 30,  2003** |   |
|-------------------------------------------------|--------|----------------------------|--------|--------------------------|--------|
| **Assets**                                      |   |                       |   |                     |   |
| Current assets:                                 |   |                       |   |                     |   |
| Cash and cash equivalents                       |   | $                          | 2,634  |                     | $      | 3,030 |   |
| Accounts receivable, net                        |   | 2,353                      |   | 2,504                    |   |
| Prepaid expense & other current assets      |   | 393                        |   | 290                      |   |
| Total current assets                            |   | 5,380                      |   | 5,824                    |   |
|                                            |   |                       |   |                     |   |
| Property and equipment, net                     |   | 319                        |   | 345                      |   |
| Other investments                               |   | 214                        |   | 392                      |   |
| Other assets                                    |   | 124                        |   | 114                      |   |
| Total assets                                    |   | $                          | 6,037  |                     | $      | 6,675 |   |
|                                            |   |                       |   |                     |   |
| **Liabilities and Stockholders’ Equity**   |   |                       |   |                     |   |
| Current liabilities:                            |   |                       |   |                     |   |
| Accounts payable                                |   | $                          | 625    |                     | $      | 556 |   |
| Current portion of long term debt               |   | 190                        |   | 200                      |   |
| Other accrued liabilities                       |   | 700                        |   | 822                      |   |
| Accrued compensation and related expenses       |   | 634                        |   | 652                      |   |
| Deferred revenue                                |   | 2,193                      |   | 2,936                    |   |
| Total current liabilities                       |   | 4,342                      |   | 5,166                    |   |
|                                            |   |                       |   |                     |   |
| Long term debt                                  |   | 46                         |   | —                   |   |
|                                            |   |                       |   |                     |   |
| Commitments and contingencies                   |   |                       |   |                     |   |
|                                            |   |                       |   |                     |   |
| Stockholders’ equity:                      |   |                       |   |                     |   |
| Common stock                                    |   | 22                         |   | 21                       |   |
| Additional paid-in capital                      |   | 59,461                     |   | 59,339                   |   |
| Note receivable from stockholder                |   | —                     |   | (60                      | )      |
| Accumulated other comprehensive loss            |   | (3                         | )      | (43                      | )      |
| Accumulated deficit                             |   | (57,831                    | )      | (57,748                  | )      |
| Total stockholders’ equity                 |   | 1,649                      |   | 1,509                    |   |
| Total liabilities and stockholders’ equity |   | $                          | 6,037  |                     | $      | 6,675 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFY CORPORATION**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

(unaudited)

 
|                                                  |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|-------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                  |   | **2003**                                 |   | **2002**                               |   | **2003** |   | **2002** |   |
| Revenues:                                             |   |                                     |   |                                   |   |   |   |   |   |
| Software licenses                                     |   | $                                        | 1,406  |                                   | $      | 1,343 |   | $ | 3,242 |   | $ | 2,448 |   |
| Services                                              |   | 1,398                                    |   | 1,588                                  |   | 2,863 |   | 3,121 |   |
| Total revenues                                        |   | 2,804                                    |   | 2,931                                  |   | 6,105 |   | 5,569 |   |
|                                                  |   |                                     |   |                                   |   |   |   |   |   |
| Cost of revenues:                                     |   |                                     |   |                                   |   |   |   |   |   |
| Software licenses                                     |   | 101                                      |   | 66                                     |   | 187 |   | 134 |   |
| Services                                              |   | 328                                      |   | 305                                    |   | 648 |   | 539 |   |
| Total cost of revenues                                |   | 429                                      |   | 371                                    |   | 835 |   | 673 |   |
|                                                  |   |                                     |   |                                   |   |   |   |   |   |
| Gross margin                                          |   | 2,375                                    |   | 2,560                                  |   | 5,270 |   | 4,896 |   |
|                                                  |   |                                     |   |                                   |   |   |   |   |   |
| Operating expenses:                                   |   |                                     |   |                                   |   |   |   |   |   |
| Product development                                   |   | 672                                      |   | 1,063                                  |   | 1,679 |   | 2,189 |   |
| Selling, general and administrative                   |   | 1,580                                    |   | 1,611                                  |   | 3,384 |   | 3,182 |   |
| Write-down of other investments                       |   | 0                                        |   | 0                                      |   | 175 |   | 20 |   |
| Special charges (recovery)                            |   | 53                                       |   | (26                                    | )      | 102 |   | (132 | ) |
| Total operating expenses                              |   | 2,305                                    |   | 2,648                                  |   | 5,340 |   | 5,259 |   |
|                                                  |   |                                     |   |                                   |   |   |   |   |   |
| Income (loss) from operations                         |   | 70                                       |   | (88                                    | )      | (70 | ) | (363 | ) |
| Other income (expense), net                           |   | (1                                       | )      | 16                                     |   | (3 | ) | 6 |   |
| Income (loss) before income taxes                     |   | 69                                       |   | (72                                    | )      | (73 | ) | (357 | ) |
| Provision for income taxes                            |   | 8                                        |   | 13                                     |   | 10 |   | 13 |   |
| Net income (loss)                                     |   | $                                        | 61     |                                   | $      | (85 | ) | $ | (83 | ) | $ | (370 | ) |
|                                                  |   |                                     |   |                                   |   |   |   |   |   |
| Net income (loss) per share:                          |   |                                     |   |                                   |   |   |   |   |   |
| Basic                                                 |   | $                                        | 0.00   |                                   | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Diluted                                               |   | $                                        | 0.00   |                                   | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Shares used in computing net income (loss) per share: |   |                                     |   |                                   |   |   |   |   |   |
| Basic                                                 |   | 21,474                                   |   | 20,873                                 |   | 21,408 |   | 20,764 |   |
| Diluted                                               |   | 22,594                                   |   | 20,873                                 |   | 21,408 |   | 20,764 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**UNIFY CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

(In thousands)

(Unaudited)

 
|                                                                    |   | **Six Months Ended October 31,** |   |
|-------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                    |   | **2003**                              |   | **2002** |   |
| Cash flows  from operating activities:                                  |   |                                  |   |   |   |
| Net (loss)                                                              |   | $                                     | (83    | ) | $ | (370 | ) |
| Reconciliation  of net (loss) to net cash used in operating activities: |   |                                  |   |   |   |
| Depreciation                                                            |   | 84                                    |   | 72 |   |
| Write-down  of other investments                                        |   | 175                                   |   | 20 |   |
| Stock based  expense                                                    |   | 52                                    |   | 131 |   |
|                                                                    |   |                                  |   |   |   |
| Changes in  operating assets and liabilities:                           |   |                                  |   |   |   |
| Accounts  receivable, net                                               |   | 219                                   |   | 989 |   |
| Prepaid  expenses and other current assets                              |   | (98                                   | )      | 106 |   |
| Accounts  payable                                                       |   | 67                                    |   | (163 | ) |
| Accrued  compensation and related expenses                              |   | (35                                   | )      | (41 | ) |
| Other  accrued liabilities                                              |   | (139                                  | )      | (524 | ) |
| Deferred  revenue                                                       |   | (816                                  | )      | (734 | ) |
| Net cash  used in operating activities                                  |   | (574                                  | )      | (514 | ) |
|                                                                    |   |                                  |   |   |   |
| Cash flows  from investing activities:                                  |   |                                  |   |   |   |
| Increase in  restricted cash                                            |   | —                                |   | (3 | ) |
| Purchases of  property and equipment                                    |   | (57                                   | )      | (26 | ) |
| Decrease in  other investments                                          |   | 3                                     |   | — |   |
| Decrease in  other assets                                               |   | 4                                     |   | 11 |   |
| Net cash  (used) in investing activities                                |   | (50                                   | )      | (18 | ) |
|                                                                    |   |                                  |   |   |   |
| Cash flows  from financing activities:                                  |   |                                  |   |   |   |
| Borrowings  of long-term debt                                           |   | 100                                   |   | — |   |
| Repayments  of long-term debt                                           |   | (64                                   | )      | (120 | ) |
| Proceeds from issuance of common stock, net                             |   | 70                                    |   | 71 |   |
| Payable to  minority interest stockholders                              |   | —                                |   | (309 | ) |
| Collection of notes receivable stockholder                              |   | 60                                    |   | — |   |
| Net cash  provided (used) in financing activities                       |   | 166                                   |   | (358 | ) |
|                                                                    |   |                                  |   |   |   |
| Effect of  exchange rate changes on cash                                |   | 62                                    |   | 120 |   |
|                                                                    |   |                                  |   |   |   |
| Net decrease  in cash and cash equivalents                              |   | (396                                  | )      | (770 | ) |
|                                                                    |   |                                  |   |   |   |
| Cash and  cash equivalents, beginning of period                         |   | 3,030                                 |   | 2,993 |   |
|                                                                    |   |                                  |   |   |   |
| Cash and  cash equivalents, end of period                               |   | $                                     | 2,634  |   | $ | 2,223 |   |
|                                                                    |   |                                  |   |   |   |
| Supplemental  cash flow information:                                    |   |                                  |   |   |   |
| Cash paid  (received) during the period for:                            |   |                                  |   |   |   |
| Interest                                                                |   | $                                     | (5     | ) | $ | 2 |   |
| Income taxes                                                            |   | $                                     | (114   | ) | $ | — |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

5

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**UNIFY CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****              Basisof Presentation**

 

The condensed consolidated financialstatements have been prepared by Unify Corporation (the “Company”) pursuant tothe rules and regulations of the Securities and Exchange Commission (the“SEC”). While the interim financial information contained in this filing isunaudited, such financial statements reflect all adjustments (consisting onlyof normal recurring adjustments) which the Company considers necessary for afair presentation. The results for interim periods are not necessarilyindicative of the results to be expected for the entire fiscal year. Thesefinancial statements should be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto, together with Management’s Discussionand Analysis of Financial Condition and Results of Operations, which areincluded in the Company’s Annual Report on Form 10-K for the fiscal year endedApril 30, 2003 as filed with the SEC.

 

*Recently Issued**Accounting Standards*

 

In November 2002, the EITF reached aconsensus on Issue 00-21, “Multiple-Deliverable Revenue Arrangements” (“EITF00-21”). EITF 00-21 addresses how to account for arrangements that may involvethe delivery or performance of multiple products, services, and/or rights touse assets. The consensus mandates how to identify whether goods or services orboth that are to be delivered separately in a bundled sales arrangement shouldbe accounted for separately because they are “separate units of accounting.”The guidance can affect the timing of revenue recognition for sucharrangements, even though it does not change rules governing the timing orpattern of revenue recognition of individual items accounted for separately.The final consensus is applicable to agreements entered into in fiscal periodsbeginning after June 15, 2003. Additionally, companies will be permittedto apply the consensus guidance to all existing arrangements as the cumulativeeffect of a change in accounting principle in accordance with APB Opinion No.20, Accounting Changes. The Company adopted the provisions of EITF 00-21 forfiscal 2004, which did not result in a material impact to our financial position,cash flows or results of operations.

 

In December 2002, the FASB issued Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” (“Statement 148”). Statement 148 amendsStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation,” (“Statement 123”) and provides alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. Statement 148 also amends thedisclosure requirements of Statement 123 to require more prominent and frequentdisclosures in financial statements about the effects of stock-basedcompensation. The transition guidance and annual disclosure provisions of Statement148 are effective for financial statements issued for fiscal years ending afterDecember 15, 2002. The interim disclosure provisions are effective forfinancial reports containing financial statements for interim periods beginningafter December 15, 2002. The Company adopted the disclosure provisions ofStatement 148 for fiscal 2004, which did not result in a material impact to ourfinancial position, cash flows or results of operations.

 

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In January 2003, the FASB issuedInterpretation Number 46, “Consolidation of Variable Interest Entities - aninterpretation of ARB No. 51” (FIN46). FIN 46 establishes accounting guidance for consolidation of a variableinterest entity (“VIE”), formerly referred to as special purpose entities. FIN46 applies to any business enterprise, both public and private, that has acontrolling interest, contractual relationship or other business relationshipwith a VIE. FIN 46 provides guidance for determining when an entity, the PrimaryBeneficiary, should consolidate another entity, a VIE.  This statement is effective immediately forvariable interest entities created after January 31, 2003 and by the firstinterim or annual reporting period commencing after December 15, 2003, forvariable interest entities created prior to February 1, 2003.  The Company is continuing to assess theimpact of FIN 46.

 

**2.   StockCompensation Information**

 

As permitted by Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based compensation” (SFAS 123) and Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” (SFAS 148), the Company accounts forstock-based awards using the intrinsic value method of accounting in accordancewith Accounting Principles Board Opinion No. 25, “Accounting For Stock IssuedTo Employees” and related interpretations. As such, compensation is recorded onthe measurement date, generally the date of issuance or grant, as the excess ofthe current estimated fair value of the underlying stock over the purchase orexercise price. Any deferred compensation is amortized over the respectivevesting periods of the equity instruments, if any.  Option valuation models were developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions, including the expected life of the option. Because theCompany’s employee stock options have characteristics significantly differentfrom those of traded options and because changes in the subjective inputassumptions can materially affect the fair value estimates, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

The Company’s calculations are made using the Black-Scholes optionpricing model, with the following weighted average assumptions for the threemonths ending October 31, 2003 and 2002, respectively: expected optionlife, 12 months following vesting; stock volatility of 125% and 118%; risk-freeinterest rates of 2.2%  and 2.1%; and nodividends during the expected term and for the six months endingOctober 31, 2003 and 2002, respectively; expected option life, 12 monthsfollowing vesting; stock volatility of 117% and 118%, and risk-free interestrates of 2.0%  and 2.1%. The Company’scalculations are based on a multiple option valuation approach and forfeituresare recognized as they occur.

 

7

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The following table illustrates the effect on net loss and net loss pershare if Unify had applied the fair value recognition provisions of SFAS 123,to stock-based employee compensation (in thousands, except per share amounts):

 
|                                                                                                 |   | **Three Months Ended October 31,** |   | **Six Months Ended October 31,** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                 |   | **2003**                                |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net income  (loss) as reported                                                                       |   | $                                       | 61     |                                  | $      | (85 | ) | $ | (83 | ) | $ | (370 | ) |
|                                                                                                 |   |                                    |   |                                  |   |   |   |   |   |
| Add:  stock-based employee compensation included in reported in net income (loss)                    |   | —                                  |   | 8                                     |   | 40 |   | 131 |   |
|                                                                                                 |   |                                    |   |                                  |   |   |   |   |   |
| Less:  stock-based employee compensation expense, determined under fair value method  for all awards |   | (44                                     | )      | (95                                   | )      | (99 | ) | (349 | ) |
| Proforma net  income (loss)                                                                          |   | $                                       | 17     |                                  | $      | (172 | ) | $ | (142 | ) | $ | (588 | ) |
|                                                                                                 |   |                                    |   |                                  |   |   |   |   |   |
| Net loss per  share:                                                                                 |   |                                    |   |                                  |   |   |   |   |   |
| Basic per  share, as reported                                                                        |   | $                                       | 0.00   |                                  | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Basic per  share, pro forma                                                                          |   | $                                       | 0.00   |                                  | $      | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) |
|                                                                                                 |   |                                    |   |                                  |   |   |   |   |   |
| Diluted per  share, as reported                                                                      |   | $                                       | 0.00   |                                  | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Diluted per  share, pro forma                                                                        |   | $                                       | 0.00   |                                  | $      | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) |

 

**3.****              OtherInvestments**

 

Otherinvestments represent common stock in two closely held technology companies.The Company’s ownership interest in each company is less than 15%.  Other investments consisted of the following(in thousands):

 
|                                 |   | **October 31,  2003** |   | **April 30,  2003** |   |
|--------------------------------------|--------|----------------------------|--------|--------------------------|--------|
|                                 |   |                       |   |                     |   |
| Arango  Software International, Inc. |   | $                          | 175    |                     | $      | 350 |   |
| Unify Japan                          |   | 39                         |   | 39                       |   |
| Other                                |   | —                     |   | 3                        |   |
|                                 |   |                       |   |                     |   |
|                                 |   | $                          | 214    |                     | $      | 392 |   |

 

The Company holds a minority interest in Arango Software International,Inc. (or “Arango”), a privately-held corporation headquartered in Panama. We assess the valuation of Arango whenevercircumstances indicate that there is a decline in carrying value below costthat is other-than temporary. Several factors can trigger an impairment reviewsuch as significant

 

8

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underperformance relative to expected historical or projected futureoperating results and significant negative industry or economic trends. Inassessing potential impairment for such investments, we consider these factorsas well as the forecasted financial performance. When such decline in value isother-than-temporary, we recognize an impairment loss in the current periodoperating results to the extent of the decline.  During the first quarter of fiscal 2004, the Company reduced thecarrying value of its investment in Arango by $175,000.  Future adverse changes in market conditionsor poor operating results of Arango could result in losses or an inability torecover the carrying value of the investment that is not currently reflected inthe investment’s carrying value, thereby possibly requiring an impairmentcharge in the future.

 

**4.****              Credit Facility**

 

On June 6, 2003, the Company executed a$1.5 million revolving line of credit with Silicon Valley Bank. The line issecured by qualifying accounts receivable, foreign and domestic, and has aone-year term. The Company incurs interest expense on funds used at theprevailing prime rate, not to be less than 4.25% per annum, plus twopercent.  The line of credit has a borrowing limit of$1.5 million; as of October 31, 2003, based upon the amount of itseligible assets at that time, the Company had available for borrowing up to$0.6 million.  There was nobalance on the line of credit as of October 31, 2003.

 

In connection with the $1.5 million revolvingline of credit, the Company issued warrants to Silicon Valley Bank to purchase115,385 shares of Company stock at a per share price of $0.39 exercisablethrough June 6, 2010.  The Companyrecorded the fair value of the warrants as a debt discount and an  increase in additional-paid-in-capital inthe accompanying financial statements. The Company determined the fair value of the warrants using theBlack-Scholes option pricing model, the fair value of the Company’s stock atthe date of issuance, volatility factor of 70%, risk free-interest rate of2.1%, expected life of 10 years and no dividend yield.  This amount totaling $34,600 is beingamortized over the term of the debt through interest expense.

 

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**5.   Long-term Debt**

 

The Company’s debt consists of the followingat October 31, 2003 and April 30, 2003 (in thousands):

 
|                                                                                                                                                                                                                                   |   | **October 31,  2003** |   | **April 30,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                   |   |                       |   |                     |   |
| Unsecured note payable to  a third party, payable in monthy installments of $20 through  February 2004                                                                                                                            |   | $                          | 140    |                     | $      | 200 |   |
|                                                                                                                                                                                                                                   |   |                       |   |                     |   |
| Note payable to a  financial institution , accruing interest at prime plus 2.0%, not to be less  than 4.25% per annum (actual interest at October 31, 2003 was 6.25%),  payable in monthly installments through October 2006 |   | 96                         |   | —                   |   |
|                                                                                                                                                                                                                                   |   | 236                        |   | 200                      |   |
| Less current portion                                                                                                                                                                                                                   |   | (190                       | )      | (200                     | )      |
|                                                                                                                                                                                                                                   |   | $                          | 46     |                     | $      | — |   |

 

**6.****              ComprehensiveIncome (Loss)**

 

The Company’stotal comprehensive income (loss) for the periods shown was as follows:

 
|                               |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                               |   | **2003**                                 |   | **2002**                               |   | **2003** |   | **2002** |   |
| Net income (loss)                  |   | $                                        | 61     |                                   | $      | (85 | ) | $ | (83 | ) | $ | (370 | ) |
| Foreign  currency translation gain |   | 7                                        |   | 3                                      |   | 40 |   | 96 |   |
|                               |   |                                     |   |                                   |   |   |   |   |   |
| Total  comprehensive income (loss) |   | $                                        | 68     |                                   | $      | 82 |   | $ | (43 | ) | $ | (274 | ) |

 

**7.****              SpecialCharges**

 

InJuly 2000, the Company announced that certain matters had come to theattention of the Company’s Board of Directors that indicated that the Companyhad engaged in improper accounting practices. Accordingly, the Board ofDirectors authorized its Audit Committee to conduct an investigation of theCompany’s accounting and financial reporting practices and to

 

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recommend remedial action, if any (for expanded discussion see Form10-K for the period ended April 30, 2003). As a result of the UnitedStates Attorney’s office litigation against one of the Company’s formerofficers, the Company continues to incur additional legal costs.  According to published reports, onNovember 20, 2003, the former officer was convicted of 10 counts ofsecurities fraud and one count of conspiracy. During the three month periods ended October 31, 2003 and 2002, theCompany recorded special charges of $53,000 and recoveries of $26,000,respectively. During the six month periods ended October 31, 2003 and2002, the Company recorded special charges of $102,000 and recoveries of$132,000, respectively. See Part II, Item 1.

 

**8.   Earnings Per Share**

 

SFAS No. 128, *Earnings Per Share,* requiresa dual presentation of basic and diluted income (loss) per share (“EPS”). BasicEPS excludes dilution and is computed by dividing net income (loss)attributable to common stockholders by the weighted average of common sharesoutstanding for the period. Diluted EPS reflects the potential dilution thatcould occur if securities or other contracts to issue common stock (e.g.convertible preferred stock, warrants, and common stock options) were exercisedor converted into common stock. The following is a reconciliation of thenumerators and denominators of the basic and diluted income (loss) per sharecomputations for the periods indicated (in thousands, except per share amounts):

 
|                                                                                |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                                |   | **2003**                                 |   | **2002**                               |   | **2003** |   | **2002** |   |
| **Net Income (Loss)  (Numerator):**                                            |   |                                     |   |                                   |   |   |   |   |   |
| Net income  (loss), basic and diluted                                               |   | $                                        | 61     |                                   | $      | (85 | ) | $ | (83 | ) | $ | (370 | ) |
| **Shares   (Denominator):**                                                    |   |                                     |   |                                   |   |   |   |   |   |
| Weighted average  shares of common stock outstanding, basic                         |   | 21,474                                   |   | 20,873                                 |   | 21,408 |   | 20,764 |   |
| Weighted  average common equivalent shares outstanding                              |   | 1,120                                    |   | —                                 |   | — |   | — |   |
| Weighted  average shares of common stock outstanding, diluted                       |   | 22,594                                   |   | 20,873                                 |   | 21,408 |   | 20,764 |   |
|                                                                                |   |                                     |   |                                   |   |   |   |   |   |
| **Per Share Amount:**                                                               |   |                                     |   |                                   |   |   |   |   |   |
| Net income  (loss) per share, basic                                                 |   | $                                        | 0.00   |                                   | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Reduction in  net income per share due to Weighted average common equivalent shares |   | 0.00                                     |   | 0.00                                   |   | 0.00 |   | 0.00 |   |
|                                                                                |   |                                     |   |                                   |   |   |   |   |   |
| Net income  (loss) per share, diluted                                               |   | $                                        | 0.00   |                                   | $      | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) |

 

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**9.****              MaintenanceContracts**

 

The Company offers maintenance contracts toits customers at the time they enter into a product license agreement andrenews those contracts, at the customers’ option, annually thereafter. Thesemaintenance contracts are priced as a percentage of the value of the relatedlicense agreement. The specific terms and conditions of these initial maintenancecontracts and subsequent renewals vary depending upon the product licensed andthe country in which the Company does business. Generally, maintenancecontracts provide the customer with unspecified product maintenance updates andcustomer support services. Revenue from maintenance contracts is initially deferred and thenrecognized ratably over the term of the agreements.

 

Changes in the Company’s deferred maintenancerevenue during the periods are as follows:

 
|                                 |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|--------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                 |   | **2003**                                 |   | **2002**                               |   | **2003** |   | **2002** |   |
|                                 |   |                                     |   |                                   |   |   |   |   |   |
| Balances,  beginning of period       |   | $                                        | 2,295  |                                   | $      | 2,774 |   | $ | 2,846 |   | $ | 2,932 |   |
|                                 |   |                                     |   |                                   |   |   |   |   |   |
| Amount  recognized during the period |   | (1,326                                   | )      | (1,401                                 | )      | (2,716 | ) | (2,863 | ) |
|                                 |   |                                     |   |                                   |   |   |   |   |   |
| Amount of  new maintenance contracts |   | 1,184                                    |   | 1,070                                  |   | 2,023 |   | 2,374 |   |
|                                 |   |                                     |   |                                   |   |   |   |   |   |
| Balances,  end of period             |   | $                                        | 2,153  |                                   | $      | 2,443 |   | $ | 2,153 |   | $ | 2,443 |   |

 

**10.****       Commitmentsand Contingencies**

 

TheCompany is subject to legal proceedings and claims that arise in the normalcourse of business.  The Company cannotassure that it would prevail in such matters nor can it assure that any remedycould be reached on mutually agreeable terms, if at all.  Due to the inherent uncertainties oflitigation, were there any such matters, the Company may not be able toaccurately predict their ultimate outcome. As of October 31, 2003, therewere no current proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position, resultsof operations, or cash flows.

 

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**UNIFYCORPORATION**

 

**Item2****.   Management’s Discussion and Analysis ofFinancial Condition and Results****of Operations**

 

*The discussion in this Quarterly Report on Form 10-Q containsforward-looking statements that have been made pursuant to the provisions ofthe Private Securities Litigation Reform Act of 1995. Such forward-lookingstatements are based on current expectations, estimates and projections aboutthe software industry and certain assumptions made by the Company’s management.Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”,“seeks”, “estimates”, variations of such words and similar expressions areintended to identify such forward-looking statements. These statements are notguarantees of future performance and are subject to certain risks,uncertainties and assumptions that are difficult to predict; therefore, actualresults may differ materially from those expressed or forecasted in any such forward-lookingstatements. Such risks and uncertainties include, but are not limited to, thoseset forth herein under “Volatility of Stock Price and General Risk FactorsAffecting Quarterly Results” and in the Company’s Annual Report on Form 10-Kunder “Business – Risk Factors.” Unless required by law, the Company undertakesno obligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise. However, readers shouldcarefully review the risk factors set forth in other reports or documents theCompany files from time to time with the SEC, particularly the Company’s AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports onForm 8-K.*

 

The following discussion should be read inconjunction with the unaudited Condensed Consolidated Financial Statements andNotes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and withthe audited Consolidated Financial Statements and Notes thereto, together withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, which are included in the Company’s Annual Report on Form 10-K forthe fiscal year ended April 30, 2003 as filed with the SEC.

 

**Overview**

 

Unifyis a global enterprise software company. Leveraging 23 years of software innovation to more than 2,000 customersand 300 ISV partners worldwide, Unify delivers a comprehensive,vendor-independent application platform suite. With Unify products, customers are able to deliver technology solutionsthat significantly enhance revenue opportunities, improve operationaleffectiveness and enrich customer relationships. Ourcustomers include healthcare, financial services, government andmanufacturing organizations, among others.

 

TheCompany’s flagship product, Unify NXJ, launched inOctober 2002, enables organizations to effectively automate processeswithin and between organizations and enterprises, consolidate multiple legacysystems into unified composite applications, and provide advanced collaborativeinformation systems for distributed teams and workforces.  The Unify NXJ platform provides acomprehensive set of application services including business processmanagement, reporting, portal and portal integration forms processing, andenterprise application integration, as well as assembly and orchestrationcomponents.  Unify NXJ can be deliveredas a completely integrated suite or as an integrated services platform fordelivering solutions across all leading J2EE infrastructure stacks.

 

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Unify’s rapid application development product line,ACCELL, graphical client/server application development product, VISION, anddatabase management product family, DataServer, enable IT organizations torapidly develop and deliver business applications critical to theenterprise.  We help companies solvebusiness and IT challenges by providing a broad range of applicationdevelopment product solutions that are easy to use and cost-effective to changeand maintain.

 

**Critical Accounting Policies**

 

The following discussion and analysis of theCompany’s financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent liabilities. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. The areas that requiresignificant judgment are as follows.

 

Revenue recognition.  The Company generates revenue from softwarelicense sales and related services, including maintenance and support, trainingservices and consulting services. The Company licenses its products to end usercustomers, independent software vendors and value added resellers. The Companyrecognizes revenue for software license sales in accordance with Statement ofPosition 97-2, “Software Revenue Recognition” as effected by Statement ofPosition 98-4 “Deferral of the Effective Date of a Provision of SOP 97-2” andStaff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements.” The nature of each licensing arrangement determines how revenuesand related costs are recognized.

 

The Company’s customer contracts includemulti-element arrangements that include a delivered element, software license,and an undelivered element, maintenance and support. The value allocated to theundelivered element is unbundled from the delivered element based onvendor-specific objective evidence (VSOE) of the relative fair value of themaintenance and support, regardless of any separate prices stated within thecontract. VSOE of fair value is defined as (i) the price charged when the sameelement is sold separately, or (ii) if the element has not yet been soldseparately, the price for the element established by management having therelevant authority when it is probable that the price will not change beforethe introduction of the element into the marketplace. The Company thenallocates the remaining balance to the delivered element, software license,regardless of any separate prices stated within the contract. The Company’scustomer contracts do not require the Company to perform significantproduction, modification or customization of the software.

 

Revenue is recognized when a noncancelablelicense agreement has been signed or other persuasive evidence of anarrangement exists, the software product or service has been shipped orelectronically delivered, the license fees are fixed and determinable andcollectibility is probable.

 

An assessment of the ability of the Company’scustomers to pay is another consideration that affects revenue recognition. Insome cases, the Company sells to undercapitalized customers. In thosecircumstances, revenue recognition is deferred until cash is received, thecustomer has established a history of making timely payments or the customer’sfinancial condition has improved. Furthermore, once revenue has beenrecognized, the Company evaluates the related accounts receivable balance ateach period end for amounts that we believe may no longer be collectible. Thisevaluation is largely done based on a review of the financial condition viacredit agencies and historical experience with the customer. Any deteriorationin credit worthiness of a customer may impact the Company’s evaluation ofaccounts receivable in any given period.

 

Revenue from support and maintenanceactivities, which consist of fees for ongoing support and unspecified productupdates, are recognized ratably over the term of the maintenance contract,

 

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typically one year, and the associated costsare expensed as incurred. Consulting service arrangements are performed on a“best efforts” basis and are generally billed under time-and-materialsarrangements. Revenues and expenses relating to providing consulting servicesare recognized as the services are performed.

 

Valuation of long-lived assets.  Our long-lived assets are comprised oflong-term investments. At October 31, 2003, we had $214,000 in long-terminvestments, which are accounted for under the cost method. We assess thevaluation of long-lived assets whenever circumstances indicate that there is adecline in carrying value below cost that is other-than temporary.  Several factors can trigger an impairmentreview such as significant underperformance relative to expected historical orprojected future operating results and significant negative industry oreconomic trends. In assessing potential impairment for such investments, weconsider these factors as well as the forecasted financial performance. Whensuch decline in value is other-than-temporary, we recognize an impairment lossin the current period operating results to the extent of the decline. Werecognized $0 and $175,000 in impairment losses related to long-terminvestments in the quarter ended and six months ended October 31, 2003,respectively. Future adverse changes in market conditions or poor operatingresults could result in losses or an inability to recover the carrying value ofthe long-term investments that is not currently reflected in the investmentscarrying value, thereby, possibly requiring additional impairment charges inthe future.

 

Deferred tax asset valuation allowance.  As of October 31, 2003, we haveapproximately $18.6 million of deferred tax assets related principally to netoperating loss carry forwards, reserves and other accruals, deferred revenue,and foreign tax credits. A valuation allowance has been recorded to offsetthese deferred tax assets. The ability of the Company to ultimately realize itsdeferred tax assets will be contingent upon the Company achieving taxableincome. There can be no assurance that this will occur in amounts sufficient toutilize the deferred tax assets. Should we determine that we would be able to realizethe deferred tax assets in the future in excess of the recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made.

 

**Results of Operations**

** **

The Company generated a net profit for thesecond quarter of fiscal 2004 of $61,000, or zero cents per share compared to anet loss for the second quarter of fiscal 2003 of ($85,000), or a zero centloss per share.  The net profit for thesecond quarter of fiscal 2004 includes $53,000 in special charges, primarilylegal fees, relating to the Company’s participation in the prosecution of twoof the Company’s former officers by the United States Attorney’s office, whilethe net loss for the second quarter of the previous year includes recoveries ofspecial charges of $26,000. The Company incurred a net loss for the six monthsended October 31, 2003 of ($83,000), or zero cents per share compared to anet loss of ($370,000) or a ($.02) loss per share for the same period in theprevious year. The net loss in the six months ended October 31, 2003included severance expenses of $200,000 associated with a reduction in forcethat the Company undertook during the first quarter of fiscal 2004, a $175,000write-down of the Company’s investments in other assets, and $102,000 inspecial charges.  The net loss for thefirst six months of the fiscal 2003 included a $20,000 write-down of theCompany’s investments in other assets, and $132,000 in recoveries of specialcharges. See Part II, Item 1.

 

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Thefollowing table sets forth, for the periods indicated, certain financial dataas a percentage of total revenue:

 
|                                |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|-------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                |   | **2003**                                 |   | **2002**                               |   | **2003** |   | **2002** |   |
| Revenues:                           |   |                                     |   |                                   |   |   |   |   |   |
| Software Licenses                   |   | 50.1                                     | %      | 45.8                                   | %      | 53.1 | % | 44.0 | % |
| Services                            |   | 49.9                                     | %      | 54.2                                   | %      | 46.9 | % | 56.0 | % |
| Total revenues                      |   | 100.0                                    | %      | 100.0                                  | %      | 100.0 | % | 100.0 | % |
|                                |   |                                     |   |                                   |   |   |   |   |   |
| Cost of Revenues:                   |   |                                     |   |                                   |   |   |   |   |   |
| Software licenses                   |   | 3.6                                      | %      | 2.3                                    | %      | 3.1 | % | 2.4 | % |
| Services                            |   | 11.7                                     | %      | 10.4                                   | %      | 10.6 | % | 9.7 | % |
| Total cost of revenues              |   | 15.3                                     | %      | 12.7                                   | %      | 13.7 | % | 12.1 | % |
|                                |   |                                     |   |                                   |   |   |   |   |   |
| Gross profit                        |   | 84.7                                     | %      | 87.3                                   | %      | 86.3 | % | 87.9 | % |
|                                |   |                                     |   |                                   |   |   |   |   |   |
| Operating Expenses:                 |   |                                     |   |                                   |   |   |   |   |   |
| Product development                 |   | 24.0                                     | %      | 36.2                                   | %      | 27.5 | % | 39.3 | % |
| Selling, general and administrative |   | 56.3                                     | %      | 55.0                                   | %      | 55.4 | % | 57.1 | % |
| Write-down of long-lived assets     |   | 0.0                                      | %      | 0.0                                    | %      | 2.9 | % | 0.4 | % |
| Special charges (recovery)          |   | 1.9                                      | %      | (0.9                                   | )%     | 1.7 | % | (2.4 | )% |
| Total operating expenses            |   | 82.2                                     | %      | 90.3                                   | %      | 87.5 | % | 94.4 | % |
|                                |   |                                     |   |                                   |   |   |   |   |   |
| Income (loss) from operations       |   | 2.5                                      | %      | (3.0                                   | )%     | (1.1 | )% | (6.5 | )% |
| Other income (expense), net         |   | 0.0                                      | %      | 0.5                                    | %      | 0.0 | % | 0.1 | % |
| Income (loss) before income taxes   |   | 2.5                                      | %      | (2.5                                   | )%     | (1.2 | )% | (6.4 | )% |
| Provision for income taxes          |   | 0.3                                      | %      | 0.4                                    | %      | 0.2 | % | 0.2 | % |
| Net income (loss)                   |   | 2.2                                      | %      | (2.9                                   | )%     | (1.4 | )% | (6.6 | )% |

 

*Revenues*

 

Total revenue for the three months endedOctober 31, 2003 decreased 4% from the same quarter of the prior year to$2.8 million. Total revenue for the six months ended October 31, 2003increased 10% to $6.1 million from the same period of the prior year. Softwarelicense revenues increased $0.1 million or 5% and $0.8 million or 32% for thethree and six month periods ended October 31, 2003, respectively over thesame periods for the previous year due to increased sales activity withoverseas customers and increases in license revenues from Unify NXJ.

 

Services revenue decreased $0.2 millionor 12% for the three months ended October 31, 2003, and $0.3 million or 8%for the six months ended October 31, 2003, as compared to the same periodsof the prior fiscal year. Revenuesin North America decreased $0.5 million and $0.7 million in the second quarterand first six months, respectively, of fiscal 2004, compared to the sameperiods of the prior fiscal year as the Company began to increase itsinvestments in North American sales and marketing. Outside North America,revenues increased as a percentage of total revenues from 51% to 67% during thesix months ended October 31, 2003, compared to the same six month periodof the prior fiscal year.

 

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The portion of services revenue representingmaintenance revenues decreased for the three month period and for the six monthcomparative periods by 5%. The Company generally renews about 75% of its maintenance agreements,which is typically augmented by new maintenance revenues from new productrevenues. The reductions in maintenance revenues for the three month periodalso reflect the decrease in renewal maintenance orders as a result of largecontracts, whose renewal dates were within the quarter ended October 31,2003, being signed in early November, after the end of the quarter.Consulting and training revenues for the three month and six month periodsended October 31, 2003 decreased $0.1 million net, as compared to the sameperiods of the prior year. During FY 2003 the Company had a consulting contractthat ended prior to the beginning of FY 2004.

 

*Cost of Revenues*

 

The Company’s cost of revenues includes cost ofsoftware licenses and cost of services. Cost of software licenses consists primarily of product documentation,packaging and production costs in the U.S. and royalties paid for licensedtechnology. Cost of services consists primarily of employee, facilities andtravel costs incurred in providing customer support under software maintenancecontracts, and consulting and training services. Total cost of revenues as apercentage of total revenues increased to 15% for the three month period endedOctober 31, 2003 from 13% for the comparative three month period of the priorfiscal year, and increased to 14% for the six month period endedOctober 31, 2003 from 12% for the same six month period of the priorfiscal year. During fiscal year 2004, the Company increased its investment incustomer support as it introduced its new product, Unify NXJ in October, 2002.

 

Cost of software licenses as a percentage ofsoftware license revenues were 7% for the three month and 6% for the six monthperiods ended October 31, 2003 as compared to 5% for both the three monthand 6% for the six month periods ended October 31, 2002, primarilyattributable to increases in software license revenues during the periods.Revenues and expenses will vary from quarter to quarter primarily because ofdifferences between revenue recognition and the recording of expenses, whichfor the most part are fixed period costs.

 

Total cost of services was unchanged at $0.3million in the second quarter of fiscal 2004 as compared to the same period ayear ago and increased to $0.6 million for the six months ended October 31,2003 versus $0.5 million during the respective comparative period in fiscal2003. The cost ofservice has a high component of fixed costs, and therefore the relative dollaramount does not fluctuate as readily with the changes in revenues. The increasein fiscal 2004 reflects the Company’s increased investment in customer supportas it introduced its new product, Unify NXJ, in October, 2002.

 

*Product Development*

 

Product development expenses consist primarily of employee andfacilities costs incurred in the development and testing of new products and inthe porting of new and existing products to additional hardware platforms andoperating systems.  For the three monthperiod ended October 31, 2003, product development expenses decreased 37%to $0.7 million from $1.1 million for the same three month period of fiscal2003. For the six month period ended October 31, 2003, product developmentexpenses decreased 23% to $1.7 million from $2.2 million for the same six monthperiod of fiscal 2003. Product development costs as a percentage of totalrevenues during the three month and six month periods ended October 31,2003 were 24% and 28% respectively, as compared to 36% and 39% for the threemonth and six month periods ended October 31, 2002. During the first sixmonths of fiscal 2004, the Company reduced its product development costs as

 

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part of a restructuring, in order to afford increased investments insales and marketing, particularly for Unify NXJ. The Company believes thatinvestments in product development are critical to maintaining technologicalleadership and therefore intends to continue to devote significant resources toproduct development in line with typical software industry averages.

 

*Selling, General and Administrative*

 

Selling, general and administrative (“SG&A”) expenses for thequarter ended October 31, 2003 were relatively flat at $1.6 million or 56%of total revenues, as compared to 55% of total revenues for the same quarter ofthe prior year. SG&A expenses for the six months ended October 31,2003 increased to $3.4 million, or 55% of total revenues, as compared to $3.2million, or 57% of total revenues, for the same period of the prior year.  The major components of SG&A for thesecond quarter of fiscal 2004 were sales expenses of $1.0 million, marketingexpenses of $0.1 million, and general and administrative expenses of $0.5million. Sales expenses increased $0.2 million as a result of increasedinvestments designed to increase the sales of Unify NXJ, including hiring a newvice president of sales and marketing and two new Unify NXJ salesrepresentatives. Marketing expenses decreased $0.1 million during the samethree month period as the Company was preparing for the new product introductionof Unify NXJ during the second quarter of fiscal 2003. General andadministrative expenses (excluding bad debt expenses) were relatively flat forthe second quarter of fiscal 2004, compared to the comparable period for theprior year. Bad debt expense decreased $0.1 million during the three monthsended October 31, 2003 compared to the same period in the prior year.

 

The major components of SG&A for the first six months of fiscal2004 were sales expenses of $2.0 million, marketing expenses of $0.4 million,and general and administrative expenses of $1.2 million and bad debt recoveriesof $0.1 million. Sales expenses increased $0.3 million compared to the same sixmonth period in fiscal 2003 as a result of the increased investments designedto increase the sales of Unify NXJ, including hiring a new vice president ofsales and marketing and two new sales representatives.  Marketing expenses increased $48,000 duringthe same two comparative periods. General and administrative expenses decreased by $0.1 million during thefirst six months of fiscal 2004 compared to the first six months of fiscal2003, primarily as a result of the normal quarter-to-quarter fluctuations thatoccur throughout the Company’s operating year. Bad debt recoveries increased by$0.1 million in the first six months of fiscal 2004 compared to fiscal 2003 asmanagement continued its revenue evaluation process to improve the performanceand quality of its outstanding receivables. The Company expects that totalSG&A expenses may fluctuate from quarter to quarter primarily because ofvariability in marketing program spending and sales commission expense.

 

*Write-downof Other Investments*

 

Duringthe first six months of fiscal 2004 and 2003, the Company recorded non-cashcharges of $175,000 and $20,000, respectively to write-down the carrying amountof its investments in Arango Software International and Evergreen Internet,Inc. to their net estimated realizable values.

 

*Special Charges*

 

In July 2000, the Company announced that certain matters had cometo the attention of the Company’s Board of Directors that indicated that theCompany had engaged in improper accounting practices during fiscal 2000.Accordingly, the Board of Directors authorized its Audit Committee to conductan investigation of the Company’s accounting and financial reporting practicesand to recommend remedial action, if any. As a result of this financialreporting investigation, the Company incurred special charges related to theinvestigation itself, legal

 

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expenses, additional auditing costs and other litigation related costs.During the second quarters of fiscal 2004 and 2003, the Company recordedspecial charges of $53,000 and recoveries of special charges, of $26,000, respectively.During the first six months of fiscal 2004 and 2003, the Company recordedspecial charges of $102,000 and recoveries of special charges of $132,000,respectively. The special charges incurred during the first six months offiscal 2004 were attributable to the ongoing costs related to the Company’scooperation with the United States Attorney office’s prosecution of a formerofficer of the Company (See Part II, Item 1). According to published reports,on November 20, 2003, the former officer was convicted of 10 counts ofsecurities fraud and one count of conspiracy. The recoveries were due primarilyto the settlement of the class action lawsuit filed against the Company andreimbursements of legal expenses under the Company’s Directors and Officersinsurance policy.

 

*Provision for Income Taxes*

 

The Company recorded tax provisions for thethree and six month periods ended October 31, 2003 and 2002 related toincome taxes payable by the Company’s foreign subsidiaries. For the sameperiods, the Company recorded no significant U.S. federal or state income taxprovisions as the Company had substantial net operating loss carry forwards.

 

**Liquidity and Capital Resources**

 

At October 31, 2003, the Company had cash, cashequivalents and short-term investments of $2.6 million, compared to $3.0million at April 30, 2003.  Workingcapital increased to $1.0 million at October 31, 2003, compared to $0.7million at April 30, 2003. Under the Company’s line of credit arrangementwith Silicon Valley Bank, which was put in place during the first quarter offiscal 2004, the Company had no amounts outstanding to the Bank as ofOctober 31, 2003. The line of credit has a borrowing limit of $1.5million; as of October 31, 2003, based upon the amount of its eligibleassets at that time, the Company had available for borrowing up to $0.6million.  In addition, as ofOctober 31, 2003 the Company had a term loan with a balance of $96,000.

 

TheCompany’s operations resulted in a decrease in cash of $0.6 million during thesix months ended October 31, 2003, as compared to a decrease of $0.5million for the same period in the prior year. The decrease in cash provided by operating activities of $1.0 millionfor the first six months of fiscal 2004 resulted from a net loss of $0.1 millionwhich included various non-cash charges of $0.3 million and severance expensesof $0.2 million associated with a reduction in force that the Company undertookduring the first quarter.  Operatingcash was provided by decreases in accounts receivable of $0.2 million alongwith increases in accounts payable of $0.1 million. Operating cash was used asa result of increases in prepaid expenses and other current assets of $0.1million, a decrease in accrued compensation and related expenses and otheraccrued liabilities of $0.2 million reflecting the pay-out of accrued vacation,in addition to the severance referred to above relating to the reduction inforce the Company undertook during the first quarter, and a decrease indeferred revenues of $0.8 million. Investing activities during the period usedcash of $57,000 for the purchase of property and equipment.  Cash provided by financing activities duringthe period was $0.2 million, which resulted primarily from the issuance ofcommon stock upon the exercise of employee stock options of $0.1 million, andthe collection of notes receivable from stockholder of $0.1 million

 

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A summary of certain contractual obligationsas of October 31, 2003 is as follows:

 
|                                    |   | **Payments  Due by Period** |
|-----------------------------------------|--------|-----------------------------|
| **Contractual  Obligations**            |   | **Total**                   |   | **1 year or  less** |   | **1-3 years** |   | **4 - 5  years** |   | **After 5  years** |   |
| **Long-Term  Debt**                     |   | $                           | 236,000 |   | $ | 190,000 |   | $ | 46,000 |   | — |   | — |   |
| **Operating  Leases**                   |   | $                           | 4,336,378 |   | 950,391 |   | 2,979,415 |   | 406,122 |   | 450 |   |
| **Total  Contractual Cash Obligations** |   | $                           | 4,572,378 |   | 1,140,391 |   | 3,025,415 |   | 406,122 |   | 450 |   |
|                                         |        |                             |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Volatility of Stock Price and General RiskFactors Affecting Quarterly Results**

 

The Company’scommon stock price has been and is likely to continue to be subject tosignificant volatility.  A variety offactors could cause the price of the Company’s common stock to fluctuate,perhaps substantially, including: announcements of developments related to theCompany’s business; fluctuations in the Company’s or its competitors’ operatingresults and order levels; general conditions in the computer industry or theworldwide economy; announcements of technological innovations; new products orproduct enhancements by the Company or its competitors; changes in financialestimates by securities analysts; developments in patent, copyright or otherintellectual property rights; developments in the Company’s relationships withits customers, distributors and suppliers; legal proceedings brought againstthe Company or its officers; and significant changes in the Company’s seniormanagement team.  In addition, in recentyears the stock market in general, and the market for shares of equitysecurities of many high technology companies in particular, has experiencedextreme price fluctuations which have often been unrelated to the operatingperformance of those companies. Such fluctuations may adversely affect themarket price of the Company’s common stock.

 

The Company’s quarterly operating results have varied significantly inthe past, and the Company expects that its operating results are likely to varysignificantly from time to time in the future. Such variations result from,among other factors, the following: the size and timing of significant ordersand their fulfillment; demand for the Company’s products; ability to sell newproducts; the number, timing and significance of product enhancements and newproduct announcements by the Company and its competitors; ability of theCompany to attract and retain key employees; seasonality; changes in pricingpolicies by the Company or its competitors; realignments of the Company’sorganizational structure; changes in the level of the Company’s operatingexpenses; changes in the Company’s sales incentive plans; budgeting cycles ofthe Company’s customers; customer order deferrals in anticipation ofenhancements or new products offered by the Company or its competitors; productlife cycles; product defects and other product quality problems; currencyfluctuations; and general domestic and international economic and politicalconditions.

 

Due to the foregoing factors, quarterly revenues and operating resultsare difficult to forecast. Revenues are also difficult to forecast because themarket for web application development software is rapidly evolving, and theCompany’s sales cycle, from initial evaluation to purchase and the provision ofmaintenance services, is lengthy and varies substantially from customer tocustomer. Because the Company normally ships products within a short time afterit receives an order, it typically does not have any material backlog. As aresult, to achieve its quarterly revenue

 

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objectives, the Company is dependent upon obtaining orders in any givenquarter for shipment in that quarter. Furthermore, because many customers placeorders toward the end of a fiscal quarter, the Company generally recognizes asubstantial portion of its revenues at the end of a quarter. As the Company’sexpense levels are based in significant part on the Company’s expectations asto future revenues and are therefore relatively fixed in the short term, ifrevenue levels fall below expectations, operating results are likely to bedisproportionately adversely affected. The Company also expects that its operating results will be affected byseasonal trends.

 

**Item 3****.Disclosures about Market Rate Risk**

 

*Interest Rate Risk*.  The Company’s exposure to market rate risk for changes ininterest rates relates primarily to its cash equivalents, which are highlyliquid investments with original maturities of three months or less and arestated at cost. Cash equivalents are generally maintained in money marketaccounts which have as their objective preservation of principal and which holdinvestments with maturity dates of less than 90 days. The Company does notbelieve its exposure to interest rate risk is material for these balances,which totaled $2.6 million at October 31, 2003. Unify does not usederivative financial instruments and places its cash equivalents with highquality issuers and, by policy, limits the amount of credit exposure to any oneissuer. If market interest rates were to change immediately and uniformly byten percent from levels at October 31, 2003, the fair value of theCompany’s cash equivalents would change by an insignificant amount.

 

*Foreign Currency Exchange Rate Risk*.  As a global concern, the Company facesexposure to adverse movements in foreign currency exchange rates. Theseexposures may change over time as business practices evolve and could have amaterial adverse impact on the Company’s business, operating results andfinancial position. Historically, the Company’s primary exposures have relatedto local currency denominated sales and expenses in Europe, Japan andAustralia. Due to the substantial volatility of currency exchange rates, amongother factors, the Company cannot predict the effect of exchange ratefluctuations on its future operating results. Although Unify takes into accountchanges in exchange rates over time in its pricing strategy, it does so only onan annual basis, resulting in substantial pricing exposure as a result offoreign exchange volatility during the period between annual pricing reviews.The Company also has currency exchange rate exposures on intercompany accountsreceivable owed to the Company as a result of local currency sales of softwarelicenses by the Company’s international subsidiaries in the United Kingdom andFrance. At October 31, 2003, the Company had $0.2 million and $0.2 millionrespectively, in such receivables, denominated in British pounds and Euros. TheCompany encourages prompt payment of these intercompany balances in order tominimize its exposure to currency fluctuations, but it engages in no hedgingactivities to reduce the risk of such fluctuations. A hypothetical ten percentchange in foreign currency rates would have an insignificant impact on theCompany’s business, operating results and financial position. The Company hasnot experienced material exchange losses on intercompany balances in the past;however, due to the substantial volatility of currency exchange rates, amongother factors, it cannot predict the effect of exchange rate fluctuations onits future business, operating results and financial position.

 

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**Item 4****. Controls and Procedures**

*** ***

*Disclosure Controlsand Procedures*. Within the 90 days prior to the date of this report, the Company carriedout an evaluation, under the supervision and with the participation of itsmanagement, including its President and Chief Executive Officer and its ChiefFinancial Officer, of the effectiveness of the design and operation of itsdisclosure controls and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934. Based upon that evaluation, the President and ChiefExecutive Officer, and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company that is required to beincluded in the Company’s periodic SEC filings.

 

*Internal Controlsand Procedures*. There were no significant changes in internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation of these controls, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

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**UNIFYCORPORATION**

 

**PARTII****.****                                                OTHERINFORMATION**

 

**Item 1.  Legal Proceedings**

 

***Litigation***

 

SEC and United States Attorney’s Office Actions: InMay 2002, the SEC brought an action against the Company and two of itsformer officers.  The SEC charged theCompany with books and records violations only and did not seek disgorgement orcivil penalties against the Company.  InMay 2002, the Company consented to the entry of a permanent injunctionwithout admitting or denying the allegations in the SEC’s complaint.

 

InMay 2002, the United States Attorney for the Northern District ofCalifornia announced the indictment of a former officer of the Company and theguilty plea of another former officer for violations of federal securitieslaws. The trial of the indicted former officer commenced on September 15,2003 and, according to published reports, on November 20, 2003, he wasconvicted of 10 counts of securities fraud and one count of conspiracy.  The Company has been advised by the UnitedStates Attorney’s Office that it will not seek to indict the Company forviolations of federal securities laws. The Company will continue to cooperate with the SEC and United StatesAttorney’s Office, as necessary, in connection with any actions pending againstany former executive officers of the Company, and cannot predict the outcome ofany such matters.

 

TheCompany is subject to legal proceedings and claims that arise in the normalcourse of business.  If such mattersarise, the Company cannot assure that it would prevail in such matters, nor canit assure that any remedy could be reached on mutually agreeable terms, if atall.  Due to the inherent uncertaintiesof litigation, were there any such matters, the Company would not be able toaccurately predict their ultimate outcome. As of October 31, 2003, therewere no current proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position,results of operations, or cash flows.

 

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**Item 4.  Submission ofMatters to a Vote of Security Holders**

 

At the annual meeting of the Company’s stockholdersheld on September 25, 2003, the following matters were voted upon:

 

**1.****             **The election ofeach of the nominees for director were approved with the following votes:

 
|              |   | **In Favor** |   | **Withheld** |   |
|-------------------|--------|--------------|--------|--------------|--------|
| Todd E. Wille     |   | 18,627,289   |   | 2,868,468    |   |
| Kurt M. Garbe     |   | 17,971,073   |   | 3,524,684    |   |
| Steve D. Whiteman |   | 17,964,379   |   | 3,531,378    |   |
| Tery R. Larrew    |   | 17,987,289   |   | 3,508,468    |   |
| Jack R. Corrie    |   | 17,937,196   |   | 3,558,561    |   |

 

**2.****             **The amendment tothe Company’s 2001 Employee Stock Option Plan to increase the number of sharesof common stock reserved for issuance from 1,950,000 shares to 2,975,000 shareswas approved, as the number of shares voted in favor of the amendment,17,982,495, represented 93% of the shares voted at the meeting. This was sufficientto pass the amendment.

 

**3.****             **The proposal toratify the selection of Ernst and Young as the Company’s independent auditorsfor fiscal 2004 was approved as the number of shares voted in favor of theamendment, 19,114,242, represented 98.85% of the shares voted at the meeting.This was sufficient to pass the amendment.

 

**Item 6****. Exhibits andReports on Form 8-K**

 
| (a)                                                                                                                                                  |   | Exhibits                                                                                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                 |   |                                                                                                                               |
|                                                                                                                                                 |   | 31.1                                                                                                                               | Certification of Chief Executive Officer  under Section 302 of the Sarbanes-Oxley Act of 2002. |
|                                                                                                                                                 |   |                                                                                                                               |   |
|                                                                                                                                                 |   | 31.2                                                                                                                               | Certification of Chief Financial Officer  under Section 302 of the Sarbanes-Oxley Act of 2002. |
|                                                                                                                                                 |   |                                                                                                                               |   |
|                                                                                                                                                 |   | 32.1                                                                                                                               | Certification  of Chief Executive Officer under 18 U.S.C Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                                                                                                                                                 |   |                                                                                                                               |   |
|                                                                                                                                                 |   | 32.2                                                                                                                               | Certification  of Chief Financial Officer under 18 U.S.C Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                                                                                                                                                 |   |                                                                                                                               |
| (b)                                                                                                                                                  |   | Reports on Form 8-K                                                                                                                |
|                                                                                                                                                 |   |                                                                                                                               |
| During the quarter ended October 31,  2003, Unify filed the following Current Reports on form 8-K with the  Securities and Exchange Commission: |
|                                                                                                                                                 |   |                                                                                                                               |
|                                                                                                                                                 |   | Form 8-K filed on September 2, 2003  containing Unify’s fiscal quarter ended July 31, 2003 earnings press  release. |
|                                                                                                                                                      |        |                                                                                                                                    |  |  |

 

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**UNIFY CORPORATION**

**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| Date: December 9, 2003 | Unify Corporation                             |
|-----------------------------|-----------------------------------------------|
|                        | *(Registrant)*                                |
|                        |                                          |
|                        | By:                                           |
|                        |                                          |
|                        | /s/ PETER J. DICORTI                          |   |
|                        | Peter J.  DiCorti                             |   |
|                        | Chief  Financial Officer                      |   |
|                        | (Principal Financial and Accounting  Officer) |   |
|                             |                                               |  |  |

 

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